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Hogsback and the weather effect on coal prices

IF YOU want to know the future price of coal <i>Hogsback</i> has discovered two types of people who can help: economists who will tell you it’s going to fall and weather forecasters who know it’s going to rise.

Tim Treadgold

The negative view of most economists has been well publicised. Apart from their traditional caution when it comes to predicting the future they can draw on data which shows the global economy has hit a flat patch thanks to the slowdown in Europe.

The positive view of the weather forecasters is less well known. In fact, they probably don’t even know it themselves and would be surprised to discover just how powerful their opinion is when it comes to the future of the coal industry.

However, over Christmas The Hog was doing a spot of background reading which threw fresh light on the importance of the weather and coal, and while the information gleaned appeared negative at first the end result of two events is extremely positive.

In the US the chaps at the National Weather Service have been playing their role as forecasters of more extreme weather events if/when planet Earth warms as predicted by environmentalists.

That view about future weather events has placed pressure on the US government to limit the expansion of the country’s coal mining industry, or at the very least limit access to land for coal mining via a leasing system which operates in that country.

The impact of the land access laws is starting to be seen: US coal production has been falling since 2008, largely because of the economic slowdown, but also because the volume of coal “leased” by the US government.

Climate change activists, who want to ban coal mining altogether in the US have been successful in limiting the annual “lease” of coal to around 270 million tonnes compared with 500Mtpa in earlier years.

In other words, the weather effect (whether right or wrong) is starting to have an effect on coal production in the US, which is, in turn, starting to have an effect on coal available for export – and that will eventually flow into the price for seaborne traded coal.

In Australia, there is a second weather effect at work which is much easier to see. It is in the clouds gathering over Queensland as a second year of a La Nina weather pattern forms, and it is in the vast volume of water still sitting at the bottom of many open-pit coal mines from last year’s La Nina downpours.

No one knows precisely what La Nina will do in the opening months of 2012, and fingers are crossed that it does not produce cyclones as powerful as Yasi, which delivered so much rain that most major coal producers were forced to declare force majeure and halt exports.

Asian steel mills were badly affected by the interrupted flow of coking coal and remain on full alert should history repeat itself. South Korea’s Posco group is taking no chances, having moved last month to stitch up a supply contract with Anglo American at a 4% higher price than the start of 2011.

Government actions are also playing a role in making coal customers nervous. Requests to pump flood waters into waterways which are normally off limits have been refused, meaning that pits have been left with last year’s floodwaters even as this year’s wet season gets underway.

No prize for guessing that if 2012 produces a cyclonic event even half the strength of Yasi then water levels in the pits will rise rapidly and a second year of force majeure declarations is possible.

Adding to the overall picture of rising coal prices is the view of the International Energy Agency published two weeks ago, which predicts rising coal demand for at least the next five years as nuclear power plants remain off-line and renewable energy schemes fail to deliver as promised.

The IEA view is based solely on the classic economic conditions of supply and demand as the global population swells and people demand access to reasonably priced electricity.

Missing from the forecasts is what The Hog has been watching – the weather.

In particular he’s been watching the build up of cloud in Far North Queensland, the first of the seasonal cyclones near Darwin, and the prospect for cyclones to form in the South Pacific.

It’s out to sea, where the weather brews, that the future price of coal will be determined, and right now the outlook is extremely promising.

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